An Inquiry into Exchanges Rate Misalignments As a Cause of the Major Global Trade Imbalances

Abstract

This study investigates the role of exchange rate misalignments as a determinant of trade imbalances in selected major trade surplus (Germany, China, Japan, Russia & KSA) and major trade deficit countries (USA, UK, France, India & Turkey). It does so by investigating whether the exchange rate has been misaligned from its equilibrium values (competitive devaluation) and whether there is some nexus between the real exchange rate misalignments and trade imbalances in under analysis economies. Employing a Structural Vector Autoregressive (SVAR) Model on data from Q1 2000 to Q1 2016, findings suggest that although exchange rate misalignment from equilibrium may have implications for the current account balance for the surplus and deficit countries. However, the effects observed were rather very mild and transitory. There was a heterogeneity in the response of the current account position to exchange rate misalignments in each country, concomitantly; the exchange rate misalignments shall not be seen as the sole responsible factor in the debate on global trade imbalances.